The theory suggested by Buckley and Casson (as cited in Nayak & Choudhury, 2014, p.6) is regarded as the internationalization theory since it focuses on the creation of multinational companies. Internationalization theory can be used to examine foreign direct investment (FDI) both at the company and industry levels (Casson, Porter, & Wadeson, 2016). The theory is based on three major concepts. First of all, companies increase profits in an imperfect market. Secondly, “since markets in intermediate products are imperfect, “they can be neglected, and internal markets are created (Nayak & Choudhury, 2014, p.7).
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Finally, this internationalization of markets generates MNCs. Buckley and Casson (as cited in Nayak & Choudhury, 2014, p.7) singled out five marker imperfections, which could lead to internationalization. They include
- the co-ordination of resources requires a long time lag;
- the efficient exploitation of market power requires discriminatory pricing;
- a bilateral monopoly produces unstable bargaining situations;
- a buyer cannot correctly estimate the price of the goods on sale;
- government interventions in international markets creates an incentive for transfer pricing (Nayak & Choudhury, 2014, p.7).
Moreover, the risk of interference from the governments of host countries should be considered.
The Knickerbocker theory of FDI is similar to that of internationalization since it is also grounded on the imperfections of a market (Nayak & Choudhury, 2014). It is also known as oligopolistic theory. There are two accepted reasons for selecting a country as a location for FDI: ”
- firms seek increased access to the host country’s market;
- firms want to utilize the relatively abundant factors available in that country” (Nayak & Choudhury, 2014, p.8).
Knickerbocker speaks about one more reason, which includes the “imitative behavior” of the company since it follows the internationalization of its rivals (Nayak & Choudhury, 2014, p.8). Unlike internationalization theory, which is concentrated mainly on market imperfections, the Knickerbocker theory explains that the probability of FDI in a country increases in case the rivals of a company has already invested there.
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Nayak, D., & Choudhury, R.N. (2014). A selective review of foreign investment theories. Economic and Social Commission for Asia and the Pacific, 143. Web.